The National Energy Board must reconsider whether a proposed natural gas pipeline critical to the development of the Pacific NorthWest liquefied natural gas project falls within provincial or federal jurisdiction, the Federal Court of Appeal has ruled.

The judgment marks a setback for the $36-billion LNG development, which secured conditional approval from the federal government last year.

"The board did not ask itself whether an arguable case for federal jurisdiction had been made out," wrote Justice Donald J. Rennie in his decision Wednesday in response to a proceeding launched by Michael Sawyer, who received funding support from the SkeenaWild Conservation Trust.

The province has green-lighted the pipeline project proposed by TransCanada Corp. (TSX:TRP). But the overall venture is still waiting for a final commitment from Pacific NorthWest LNG, which would build and operate the $11-billion facility on Lelu Island, if it proceeds.

Pacific NorthWest LNG, whose majority owner is Malaysia-based Petronas, could not be reached for comment. On its website, it says it is conducting an internal review of the project and will then table it to shareholders for a final investment decision.

Prior to launching the case, Sawyer had filed an application to the NEB asking it to hold a hearing to determine what jurisdiction the pipeline project falls under. He argued that while the pipeline's route falls fully within the province, it would ship gas destined to be exported to markets overseas, and therefore should be under federal jurisdiction.

The NEB rejected his application, but now must reconsider it due to Rennie's ruling.

"The board is reviewing the court decision and will consider next steps after doing so," NEB spokesman James Stevenson said Thursday in an email.

TransCanada has 60 days to apply for leave to appeal. Spokesman Matthew John said in an email that the company is still reviewing the ruling and considering its options.

"It is notable that this decision is not a determination that federal jurisdiction applies," he said, adding that the NEB only needs to reconsider Sawyer's case.